Does trade policy promote growth? As economic policy questions go, thisone is important. Unfortunately, the attempts of a long literature looking at cross-country evidence have failed to provide a convincing answer. Several studies find an empirical connection between openness and growth, but they tend to suffer from basic methodological shortcomings. Recent studies address these shortcomings but, once they do, they no longer find a robust empirical relationship between openness and growth. We interpret this to mean that the linear regression framework typically used is too simplistic to capture the true underlying relationship between trade policy and growth—a relationship that is full of nuances and dependent on mechanisms and circumstances. A different approach seems more promising.
This approach looks at microeconomic evidence instead of at macroeconomic evidence. It focuses on and models the specific mechanisms through which trade or trade policy operate instead of looking directly at the macroeconomic outcomes. It takes into account other elements that might influence the impact of policy measures instead of restricting this impact to be state-independent. This comes at a cost. This approach is more limited in scope. In particular, it does not provide a simple answer to the original question. Instead, it can only provide (conditional) answers to partial aspects of it. Whether one is comfortable with this more limited approach is a matter of taste. Because we believe that there are in fact no general answers to the trade and growth question, we are comfortable with investigating the smaller questions whose answers provide a more reliable basis for policy recommendation. Others will surely beg to differ.
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